Food for thought for the would-be entrepreneur (part 7 in a series)
A long, long time ago, a person who started a business was a sole proprietor, and 2 or more people who shook hands to begin a business were partners. (And nobody was a “member.”)
A partnership happens spontaneously anytime 2 people, together, buy a house to flip – or begin any other money-making venture. A partnership does not necessarily have “LLC” after its name, but it can. It can also have “LLP” (limited liability partnership.) A partnership does not even need a legal filing, though it would probably be a good idea. That is, the group really can just shake hands and start the business.
The distinction between multi-member LLC and partnership is very small, and as far as I can tell, functionally irrelevant for tax purposes. Most partnerships now register with their state and get the all-encompassing FEIN. Most partnerships also formally establish themselves as LLCs. (or LLPs.)
The real difference is fundamentally the paperwork prepared (and signed!) in advance. Without any paperwork, that is, without any partnership agreements, a group of 2 or more people who start a venture with a profit motive are depending upon the laws of their state to work out any issues and to determine who has what responsibilities and who gets what money.
Consider this: Kjeld and Knud shake hands on a house-flipping venture. If Kjeld wanders away and leaves Knud to finish the job, but there is no paperwork, the state could still determine that Kjeld gets half the proceeds of the eventual sale.
Furthermore, if the money trail is non-existent, or comprised primarily of commingled receipts, Knud might not even be able to reimburse himself for all the supplies and materials he paid for from his own funds.
Bottom line: visit a lawyer! If you can’t afford a few hundred dollars to protect yourselves from each other, you aren’t ready to go into business.